OPEC Deal: Riyadh and Tehran Reached a Pact on Reducing Crude Oil Production

As producing countries gathered in Algiers for talks on September 28, Riyadh and Tehran reached a pact on reducing crude oil production. The exact numbers will be determined in November, but the September deal is still significant. It is the first time that this kind of agreement has been announced since the 2008 crisis. The goal is to drop crude oil production to 32.5 million barrels a day (August levels were 33.47 million barrels a day). Should parties fail in reaching the agreement on November 30, it will be a disaster according to some OPEC sources. For two years, crude oil price have been tumbling. In June 2014, the Brent crude oil price was $110 a barrel and fell to $30 a barrel at the beginning of 2016. Currently, the Brent crude oil price is just under $50 a barrel. The major cause is the discovery of shale oil in the US and the recovery of Libya and Iran. As the sanctions on Iran were lifted, it had set a target output of 4m barrels a day — roughly the level it pumped before oil sanctions were imposed in 2012 — and above the country’s current level of around 3.6 mbd. This was the reason Saudi Arabia first refused to freeze its oil production. However, if the oil price continues to drop, Riyadh will suffer a fiscal deficit equal to 13.5% of GDP this year. Indeed, 73% of revenues in Saudi Arabia are based on oil. The IMF says the Saudis need oil close to $67 a barrel to recover. The problem is pressing for all OPEC members.

At an informal meeting in Algeria on Wednesday night, OPEC agreed on a production limit in the range of 32.5-33 million barrels of oil per day. Russian Energy Minister announced that Russia is ready to consider participation in joint actions of OPEC and in October-November the Russian Federation will conduct the necessary consultations with OPEC.

Heads of the two of the biggest oil producing companies in Russia, Gazprom Neft and Lukoil, expressed their views on the matter. On 30th September, Lukoil Chief Executive Vagit Alekperov said that Lukoil is not ready to reduce its oil outputs, but he agreed on the need of signing a protocol on stabilizing oil production between Russian oil producers. President of Gazprom Neft Alexander Dyukov, during an interview with “Russia 24”, also expressed concerns about cuts in production. He explained that freezing production is technically possible, but it will lead to 5-10% decline in production.

Lukoil and Gazprom Neft are the second and the fourth biggest oil companies in Russia. They produced respectively about 707 million barrels of oil and 482 million barrels of oil in 2014. Their share of the market is enough to put pressure on the Government.

Other Russian oil producing companies haven’t yet expressed their readiness to reduce output, but controversy between producers and the government will put Russia in difficult situation.

It seems that Russia’s budget shortfalls have forced them to reverse an August decision to suspend state sell-offs of key assets. The decision to allow for sale of a minority stake in Bashneft will definitely interest overseas buyers interested in the Russian market. Darya Korsunskya reported that “Russia said on Friday that it was resuming the shelved privatisation of oil firm Bashneft, in a sign of how anxious the Kremlin is to raise money to fill holes in the budget left by the economic slump.” This will raise about 1 trillion roubles by the end of the year if the deal goes through. A minority stake in Rosneft is also now up for grabs. All in all, it seems that Russia needs a stopgap injection of money to make it through the next year without eating up the rest of the sovereign wealth fund reserves.

On Friday, September 30, the Russian Energy Minister Alexander Novak announced during an interview to Rossiya 24 TV channel that a draft for an intergovernmental agreement between Russia and Turkey on the Turkish Stream project is in progress and is expected to be agreed on and signed in October 2016. Istanbul will host the World Energy Congress on October 10-12, and the Russian Government has instructed the Energy Ministry to prepare the draft before the event. This doesn’t mean that the construction of the pipeline would start right away. Gazprom still needs to obtain all of the required construction and survey permits for Turkish territorial waters. During the International Investment Forum Sochi-2016 on Friday the Gazprom Deputy CEO, Vitaly Markelov, said that most of the permits for the Turkish Stream gas pipeline project have already been obtained and the most important of them was the exploration permit. Russian President Vladimir Putin is expected to pay an official visit to Turkey in October. The main focus of the visit will be the Turkish Stream project and we may expect the signing of the agreement, which will assure the implementation of the project. Initially, Turkish Stream was conceived as an alternative to the “South Stream”, which was supposed to supply gas to Europe, bypassing Ukraine as a gas transit state. But at this stage Gazprom intends to construct only 2 of the planned 4 pipelines with an overall capacity of 63 billion cubic meters. The current project consists of two pipelines, one of which will be to supply gas for the domestic needs of Turkey and the other for the European market. Confirmations from Brussels are yet to be obtained and there are no guarantees at this stage that Russian gas will be allowed to enter EU through additional routes.

Draft intergovernmental agreement on Turkish Stream to be prepared by October 10. Russian News Agency TASS. September 30, 2016. http://tass.com/economy/903177

US LNG supplies were delivered to Europe for the third time early last week, Platts reports. The third shipment arrived in Turkey and the first two arrived to Portugal in April and Spain in the summer, respectively. Gazprom supplies neither Portugal nor Spain, but the third shipment to Turkey is significant given that a large part of Turkeys imports are from the Russian supplier. This is despite deteriorating relations last year after a Russian fighter jet was shot down by Ankara. Earlier this year Turkey became Russia’s third largest customer after Germany and Italy. Most US LNG shipments have been destined for South America, Central America, and the Caribbean, while others have gone to China, India, and the Middle East. Vladimir Debrentsov, BP’s Head of Russia and CIS economics stated, “Russian gas production costs are very low, among the cheapest in the world. My thinking is that Gazprom will undercut US LNG.”

Throughout the past couple of years, low oil prices have reduced US oil production by one million barrels a day. The last production peak was registered in April 2015 at 9.7 million barrels per day. The Permian basin exploration and exploitation of oil and gas fields has, however, proved to be immune even in times of barrel prices around the $40 USD mark. Today’s oil market is still very concerned with overproduction, and even amid talks and declarations of an OPEC freeze the Permian basin outlook for 2016 shows a rebound in its rig count. In May, the US ring count was at its lowest point with 404 rings in total. At the end of September, the count was up to 511 rigs. Out of this 107 new rigs 64 are located in the Permian basin. The reason behind this growth is what is called the ‘the Permian hydrocarbon column’. The Permian basin is characterized by its stacked formations. This allows the companies to extract using fewer wells, and as a result to operate with lower breakeven costs. In these times of crisis of the oil businesses, the shale industry has been resilient, but it has suffered losses as well. Lots of shale companies are now relocating their assets and knowhow in West Texas. This new wave of investments meant a rising price for purchasing land in the region. Shale technology is improving fast and thanks to the production cut agreed upon on the 28th of September by OPEC the Permian basin is now possibly set for an even higher level of growth.

The film “Deepwater Horizon” tells the story of the BP disaster in the Gulf of Mexico in 2010. The film does a terrific job of recreating the look and feel of the offshore oil industry as it shows the challenges of working in isolated and hostile conditions. But, it also fumbles some key details. It tells only a partial version of the story in a simplistic fashion, setting opposition between the heroes of Transocean, which owned and operated the Deepwater Horizon rig, and the villains, British Petroleum. In reality, employees of both companies were at fault. The screenplay does stick pretty closely to its source, the New York Times article on the rig’s final hours. But the film deviates from the record; it does show Transocean in a better light than BP. What is barely shown in the film is the “command confusion at a critical point in the emergency”, which was highlighted by the US Coast Guard’s report on the accident. Other criticisms of Transocean are also skated over or ignored. To find out what really happened one must read the reports from the Presidential Commission or the US Coast Guard’s Marine Board of Investigation, or the findings of fact from Judge Carl Barbier in the main court case over the disaster. Overall, what audiences can take away from the film is the vivid sense of the extraordinary engineering feat that is deep-water drilling. In that aspect, “Deepwater Horizon” has to be judged as a success.

The mass protests happening in opposition to the North Dakota Access pipeline have escalated with the arrest of more than 20 people at a pipeline construction site located in Morton County North Dakota. Police used “military-style” equipment and armored vehicles to arrest 21 protesters and charge them with various crimes, including criminal trespass on private property, possession of stolen property, and resisting arrest. Since protests began in early August, over 95 people have been arrested for opposing the further construction of the Dakota Access Pipeline. The Dakota Access Pipeline is four-state 3.7-billion-dollar project intended to carry 570,000 barrels of crude oil per day from the Dakotas to Illinois. The local Standing Rock Sioux Tribe has always opposed the pipeline construction because they feel its location (less than half a mile from their reservation) would threaten their only source of water, the Missouri River, should an oil spill happen, and encroach upon cultural heritage sites. Since August, they have been joined by protesters from other tribes located across the continental U.S. in a show of solidarity and also by environmental activists, farmers, and landowners, who had their land confiscated by the governmental power of eminent domain to make room for the pipeline. Despite the challenges to construction posed by the protesters, the pipeline is estimated to be over 60% completed.

The European Union has announced its ratification of the Paris Agreement on Climate Change. Previously, the agreement was ratified by China, the US, Brazil, India, and more than 50 other countries. The agreement enters into force ahead of schedule: it was expected that this would only happen after two or three years. In order for the agreement to enter into force, it was required that more than 55 countries responsible for more than 55% of global GHG emissions ratify it. With the EU ratification, these benchmarks were exceeded.

What’s Holding Russia Back from Ratifying the Paris Climate Agreement?

Russia officially claims that it is “getting ready to ratify the Paris Agreement with regard to the subsequent implementation of procedures required by Russian law, including an overall assessment of socioeconomic issues of the ratification and the development of the relevant national legal framework”. However, there are factors that hold the country back in this process. Firstly, as Angelina Davydiva, an expert in international relations with a focus on climate change, notes, there is strong opposition from private businesses, predominantly coal and steel sectors. Secondly, there is a perception that Russia cannot allow itself an ambitious domestic climate policy for economic reasons. “Namely, there is lack of funding for emission reduction and energy efficiency measures,” the expert notes. The article is worth reading because of the vision over Russia’s role in climate negotiations in the event the treaty enters into force without Russia’s signature – something that has just happened.

Petronas Wins Approval for Canadian LNG Project, but Gets Skeptical About Costs

Malaysian state-owned Petronas group, after a long struggle, gets a green light from the Canadian Government for the massive LNG terminal in British Columbia, development of gas fields in Alberta, and a 900 km pipeline between the provinces. The win was not easy and along with the approval they get over a 100 new conditions to be met, most of them of environmental character, tangibly raising the overall project cost. Due to overall lower prices on the energy market than the period when the Malaysian giant started investment, these are rough times for them and it may reconsider its willingness to participate. Canada on the other hand looks positively towards the 4500 new jobs the project will create started. Everyone is patiently waiting for Petronas’s next move.